Arcata Ordered To Pay $2.4 Million By End Of Week – December 20, 2012

Thursday, December 20, 2012

In March, 2011, City officlals scrambled to reroute funding out of its doomed Redevelopment Agency in order to save its affordable housing and other projects. It seemed exciting and innovative at the time, but now, says the State of California, the maneuvers weren’t legal, and the City has to repay the funds it has spent on housing projects. KLH | Eye

Kevin L. Hoover

Eye Editor

ARCATA – Imagine the City of Arcata bankrupt and its top staff, plus the City Council, all in jail.

Those not-impossible consequences could result from a decision made last week by the state’s Department of Finance (DOF). More immediately, the City has to pay an unexpected bill in the millions of dollars.

In a Dec. 15 letter, the DOF has told the City of Arcata that it is exercising its authority to “claw back assets that were inappropriately transferred,” and expects a payment of $2.415 million made to the county auditor by tomorrow, Dec. 21.

The stunning blow stems from the City’s efforts in March, 2011, to salvage the affordable housing projects it had been funding via the Redevelopment Agency. When the cash-strapped State of California dissolved redevelopment agencies and claimed the funds, the City scrambled to transfer and obligate those monies before they could be taken away.

But in its letter to the Successor Agency (which succeeded the defunct Redevelopment Agency, or RDA, and is composed of members of the City Council), the DOF called Arcata out on its fancy maneuvers, saying the City had no legal grounds on which to make the funding transfers.

Stated the letter, “the $1,858,432 transferred during March, 2011 is not allowed.” The letter states that the City’s actions run contrary to the legislation that directed the wind-down in redevelopment, ABx1-26 and AB1484.

The $2.4 million total includes $1,858,432 paid out for the Sandpiper affordable housing project, which is near completion. A smaller portion, $200,000, was spent on the Plaza Point senior housing project.

The unfinished Sandpiper project could grind to a halt because of the snafu. The developer, Resident Owned Parks (ROP), is being asked to repay the City funds it had been given to construct the 16 homes and three apartments there.

Deputy Community Development Director David Loya said the City will make “diligent, good faith efforts” to bill the private entities which received the funds and get the money back.

But, noted Loya several times in his briefing to the Successor Agency last night, recouping the funds could be problematic. “The money is gone. It’s spent,” he said.

Now what?

In a worst-case scenario, the state Board of Equalization could make the City repay the state out of future sales tax increments and property taxes, eliminating Arcata’s tax income and making bankruptcy inevitable.

Or, the state could accept repayments via installments and forego the tax grab. Other possibilities include the City taking legal action against the state, or working with its political allies to have the DOF reverse its ruling.

While all the consequences are unclear, they could include legal action against the City by affected contractors, and even legal prosecution of City staff and elected officials who were involved in redirecting the redevelopment funds.

Meanwhile, though, Arcata is looking at a seven-figure bill. The money is payable to the “taxing entity,” that is, the county auditor, for redistribution to schools, fire districts and others.

Per a vote by the Successor Agency last night, the City will make an immediate payment of $306,927 in unspent funds. It will still owe more than $2 million.

The City has 60 days to recoup the funds it has disbursed to private entities. After that, if it hasn’t repaid the total amount, a 10 percent penalty kicks in.

Ominously, the DOF letter states, “willful failure to return assets that were deemed an unallowable transfer or failure to remit the funds identified above could expose certain individuals to criminal penalties under existing law.”

‘The only choice’

Mayor Shane Brinton defended the City’s actions.

“I think it was the only choice we could make,” he said. “We knew it was a risk.”

He said it is unlikely that anyone will be prosecuted as long as the City is making good-faith efforts to recoup the funds and pay them back.

City Attorney Nancy Diamond said that the City is cooperating with the state by making the initial payment and billing Sandpiper for repayment of funds it has received.

“We’re doing what we have to do under the statutes, and making diligent efforts to recover the money,” she said.

Diamond said that the City is researching its options and will have better information about a course of action in January. That could include court action against the state or the third parties who have received the funds.

She said other municipalities’ efforts to fight the state in court weren’t going very well.

Brinton pointed out that the Oversight Board to the Successor Agency, whose members are representatives of the agencies which would have benefitted from the City surrendering redevelopment funding, nonetheless “unanimously” supported the City in pursuing the affordable housing projects instead.

“These projects were planned prior to the theft of redevelopment,” he said. “I consider the money our money.”

He and Loya noted that the City had already spent significant sum on Sandpiper when it decided in Sept., 2011 to go ahead and complete the project. Failing to do so would have left the City with what Loya called “a beautiful, million-dollar hole in the ground.”

Brinton said he was contacting Assemblymember Wes Chesbro to enlist his support. He also noted that former Assemblymember, Arcata Mayor and City Manager Dan Hauser is on ROP’s board of directors.

The DOF, Brinton suggested, ruled by executive fiat, and might be able to reverse its decison if properly persuaded.

“They could change their mind,” he said. “Hopefully we can cobble together a little group of power players and see what we can do in Sacramento.”

He said the governor and legislature had “acted out of desperation” and against their Democratic principles. Now, with a supermajority in the legislature, he hoped that “maybe there’s a way to bring back redevelopment.”

As far as the threat of criminal penalties for City officials, he doesn’t think criminalizing City workers over redevelopment funding is a a realistic possibility. He pointed out that the federal government had also suggested that it might prosecute individual employees who administer Arcata’s medical cannabis laws, and didn’t.

Fight or not?

“If there’s any way to continue to fight, I think that’s what needs to happen,” Brinton said last night. He called the turn of events “totally insane” and said the City should pursue “any potential legal recourse.”

Successor Agency Member Susan Ornelas disagreed. She said that with things not going well for other cities who are fighting the state, Arcata should to avert the possibility of penalties accruing.

“I don’t think resisting this is going to be the way to go,” she said. “Unless we have someone else we can appeal to besides the same people who keep telling us the same thing… it’s almost just an insanity to think we’re going to get something different.”

Loya pointed out again that the state is demanding $2.4 million, and “we just don’t have it.”

He said the Sandpiper units are steadily selling, though, and each one purchased for $60,000 will mean another payment the City can make in that amount to help offset the sudden debt.

‘Outrageous’

Speaking on behalf of ROP, Dan Hauser called the DOF decision “outrageous.”

“Some lower-level bureaucrat in the Department of Finance has taken it upon themselves to overturn not only a realistic determination of the law, but the City and the Oversight Board,” Hauser said.

He said ROP can’t give back money it has already spent. “Obviously, there’s no way that ROP or any of the other moderate and low-income housing folks could send money back to the City,” he said. “That would bankrupt the organization. I guess we just hand over Sandpiper to the state, unfinished?”

Hauser said he’d already been in touch with the offices of Chesbro and Evans. “This is one of those things that we’re going to have to involve our legislators to correct the Department of Finance,” he said, noting that “nothing will happen until after the first of the year.”

Hauser decried “a flat-out misinterpretation of the law” and said that “a low-level bureaucrat wielding all this power is something we may have to take up with the governor.”

Lamenting “the absurdity of the whole thing,” Hauser added, “All we’re trying to do is provide housing for folks. To be slapped down this way is outrageous.”

Early warnings

The startling turn of events wasn’t unforeseen. It just went from bad to worse.

In a “Due Diligence Report” (DDR) dated Nov. 9, the DOF had first ordered the Successor Agency to turn over $1,310,497. This led to a “meet and confer” between City and DOF officials, in which the City pled its case.

But the “final determination” which followed last week overturned the original finding and resulted in an even bigger bill.

“They essentially rejected all of the arguments made by staff,” Loya said.

But so had a former member of the Oversight Board, Arcata architect Kash Boodjeh. He cited a “clear lack” of transparency as one of the reasons he resigned.

In a Nov. 28 letter to the DOF, Boodjeh said the board had been misdirected into making poor choices by its leadership and legal counsel.

He said members of the Oversight Board and its legal counsel repeatedly characterized the law as “confused” for self-serving reasons – to “manipulate the information and prevent what was constantly being referred to as ‘a take’ by the state.”

He said that after reading the law and attending briefings in preparation for his service, “the state deadlines and rules seemed pretty darn clear to me.”

Arcata, like other California cities gouged by the loss of redevelopment, “is not the only one having a hard time letting go of what it considers its own, remaining in denial and creating alternate realities,” Boodjeh said.

He placed the blame squarely on the City. “They have broken the law, knowingly,” he said. “The gaffe is totally ours.”

Boodjeh told the Successor Agency last night that the Oversight Board’s vote last March May to support the City’s use of the funds for housing was not unanimous. Then still a member, he had abstained “due to lack of complete and clear information.”

‘Zapped’

Regardless of the outcome of the DOF/DDR/ROP/Successor Agency/Oversight Board imbroglio, Community Development Director Larry Oetker observed that the traditional manner in which the City has created affordable housing has been completely destroyed.

“We have to look at the entire affordable housing program and how we have done affordable housing,” Oetker said. “It’s just gone. It’s zapped.”

He said that the City is how “in a $2.4 million hole” from which it will have to dig out “before we can even think about doing new projects.”

Calling it a “watershed moment,” Oetker said, “It’s a large-scale, complete revamping of the system that we’ve operated on.”